$1.6bn flare gas economy to open in 2018
One of the most promising frontiers in the Nigerian oil and gas industry is the little understood and lucratively obscure $1.6bn flare gas economy. After decades of flaring gas in Nigeria, The Nigerian government seems set to open up huge investment opportunities around flare gas in 2018.
For the avoidance of doubt, the flare gas economy in Nigeria is worth much more than $1.6bn annually (N560bn). An estimated 755 million SCF is flared daily in Nigeria, which could yield 2,378,250 gallons of one fluid such as diesel, which in turn sells at $1.895 per gallon in the international market. Consequently, daily losses from Nigeria’s gas flaring amount to $4.5milion (N1.5bn) per day. Given this outlook; why is everyone not hugging flare stacks in the Niger Delta?
Recent developments in the Nigeria policy/regulatory space, advancement in GTL technology and In-situ Gas-to-Power, as well as, the state of the local refining and petrochemical market is set to transform the flare gas economy.
Regulation
Nigeria has never had a clear policy or regulation to facilitate third party access to flared gas. Failed regulatory efforts in the past focused on compelling indifferent or economically-constrained operators to utilize gas or pay a penalty for flaring. Recently (with the help of the World Bank’s Global Gas Flaring Reduction Partnership (GGFR)), Nigeria started gathering investor-optimized data on viable flare sites in the Niger Delta. The recent efforts will use a new vehicle, the Nigerian Gas Flare Commercialization Program (NGFCP) in the Ministry of Petroleum. NGFCP is expected to soon provide the frameworks and guidelines for private sector participation in the program, which may include;
a) Government-led provision of robust data on current gas flare sites, to improve the bankability of flare gas investments/lending.
b) Government may opt to take gas at zero cost from flare sites, somewhat enhancing the economics of procurement by third party gas monetizers
c) Program could provide a streamlined framework for access to operator-owned flare sites and could commence in the early part of Q1 2018.
The NGFCP will undoubtedly provide a veritable tool for investors to tap into the $1.6bn flared gas economy. But as a new, novel and currently overlooked frontier, there are several questions, data, insights and recommendations to be sought – ranging from legal, to operational, technological and risk-based considerations.
For example, what is the most economic/operational model for running a multi-flare site project that will optimize the proven volume-profit relationship for produced liquid (for GTL (projects)? What are the production-growth opportunities, especially where installed processing capacity exceeds the flared gas volume and where wellhead output is –expectedly- beyond the control of the “monitizer”. How will a flare monetization project be risk-classified by lenders/investors, given its relatively unexplored state and logical straddling between upstream and midstream operations? What will be the default and negotiated rights of the third party gas monitizer with respect to the operator’ produced gas and already built infrastructure?
When you acquire gas flare sites?
Operators flare gas for one of two reasons
1) Total absence of commercialization infrastructure and capacity – mainly gas processing and/or transport systems.
2) Presence of reason 1 (above) with a rather unprofitable economics or absent of management will.
Reason 2 is subjective, since profitability or unprofitability could be dependent on the operators own financial muscle, gas-specific technical capacity, risk inclinations and strategic play/business aspirations. If a flare gas monetization investor refuses to trust the operator’s judgments, then there are several options. However If he swallows the judgment of the flare site owner (operator) then his is left with two main technologies for flare gas utilization.
In-situ Gas-to-Power
In-situ Gas-to-Power generation is an option but it is arguably the less attractive option for many reasons. In-situ generated power cannot be sold to the operator who in most cases already has a captive generation capacity. They must therefore be fed to the grid using any of the numerous power sales frameworks which ultimately interphases with liquidity-challenged NBET (PSRIP is changing this though).
Gas-to-Liquid (GTL)
Gas-to-Liquid (GTL) is the attractive and market friendly technology. The products of GTL systems are petrochemicals such as Methanol, jet fuel, and heavier components such as propane, butane and natural gasoline, all of which have proven and developed markets in Nigeria. A GTL project is straddled between upstream and midstream businesses with a very distinct and hybrid risk profile, which (if project is well structured) might transcend the current lending apathy in the oil and gas sector. Also with a vibrant domestic market for petrochemical products; the cycle from production to sales (and thus cash flow) is markedly shorter compared to Europe-destined crude oil or Rotterdam-originated petrol for example.
Utilizing a Project Finance framework (comprising of a Project Sponsor – Special Purpose Vehicle (SPV) – EPC contractor – Off taker entitles) appears promising. Why? Since Nigerian content demands are strongly expected in the NGFCP guidelines and domestic GTL technological capacity is poor; one cannot eliminate the role of a foreign EPC & O&M contractor who could participate via any of several partnership/development models that will reduce or eliminate some operational risks. (BOO, BOT, BOOT and DBFO). With GTL, product distribution will favour trucking due to volume constraints, thereby eliminating the typical risk of disruptions to pipelines. Despite the inherent challenges of trucking, this mode has been mastered in Nigeria by the effective trucking systems that take LPG and Petrol to all nooks and crannies in Nigeria. Similarly, the cost and concerns of managing community-based challenges still falls on the operator and not the SPV.
Furthermore, the near plug and play capability of GTL systems will compress the time between license acquisition and commencement of operation, de-risking the all too common lender’s risk of loan default that occurs when operators fail to accurately project production commencement. With a flare monitizer’s GTL Operation, activities will progress within an existing and well developed operator’s infrastructure, providing several ready to use elements such as roads, power supply, some processes equipment’s, habitation quarters, tools , equipment, manpower and security supply systems (although operator will naturally lease these items for a fee, depending on regulation).
The horizon looks promising should the awaited NGFCP framework provide the needed cushion and linkages for a business already adjudged as profitable.
CHIJIOKE MAMA
Chijioke MAMA is an Energy Consultant and a Doctoral Researcher, CEO of Meiracopp Nigeria Limited (MNL). m.chijioke@meiracopp.com